Britain's reputation for high prices is an indication of just how uncompetitive parts of the economy still are Expensive
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WHEN he first arrived at 11 Downing Street, one of the first questions Gordon Brown asked his Treasury officials was: Why are prices so high in Britain? British travellers often discover that internationally traded goods—from groceries to computers and jeans—are much cheaper abroad. They return home convinced that they are routinely overcharged in their own country.
The current strength of the pound clearly accentuates this impression. Yet the fact that the price of many foreign-made goods has not fallen in Britain, as the pound has risen, indicates that something more than currency movements is at work. Ministers now say that importers have taken to referring to Britain as “Treasure Island”, a tribute to the exceptional profits they are now reaping.
The government has not hidden its concern. The Office of Fair Trading (OFT) is shortly due to report on two high-profile inquiries into the cost of new cars and the profitability of supermarkets. The chancellor has successfully pressed for an EU study examining why prices continue to vary widely across Europe—despite the establishment of a single market. Meanwhile, the consumer affairs minister, Kim Howells, will soon announce the setting up of an official price-monitoring unit, aimed at providing information to consumers.
Evidence that Britain is a relatively soft market for a wide range of products is not hard to find. An OECD study to be published later this month will confirm that the price of many widely traded goods and services is higher in Britain than in most other developed countries. The new figures are likely to be even sharper than the OECD's previous price comparison published four years ago. This showed that Britons paid 56% more than Americans for furniture and carpets, 54% more for hotels and restaurants, 31% more for sporting goods, 29% more for cars and motor cycles.
Nor is it just comparisons with the United States which show domestic consumers at a disadvantage. The European Commission's latest study of car prices, published on February 1st, found that cars in Britain currently cost up to 50% more than in other European countries. In fact, as consumer organisations have found, a whole range of goods and services are more expensive in Britain (see chart).
Why is this? It is certainly not a reflection of wealth. Britain's national income per head is about 10% lower than Germany's and 5% lower than France's. But prices stay high, even of food products like beef and pork that are in such surplus that farmers complain they are being driven to the wall. As popular resentment has grown, politicians have understandably taken up consumer complaints of price gouging. The reality, however, is more complex than political sloganising suggests.
Many reasons why
Take petrol retailing. In his last budget Mr Brown criticised fuel companies for profiteering: “The oil price has fallen by 25% in the past six months: a benefit enjoyed by oil companies which has yet to be passed on to consumers.” Two months later, to the Treasury's embarrassment, the Office of Fair Trading reported that competition among petrol retailers was fierce and that real gross margins had, pace Mr Brown, fallen by a third from 6p to 4p a litre in the past seven years. There is, in fact, a simple reason why petrol prices remain relatively high in Britain. Tax now accounts for 85% of the pump price of four-star leaded petrol, one of the highest levels in Europe.
Journalists who have attacked British supermarkets for ripping off housewives may also be in for a disappointment. A Sunday Times survey found that the cost of many popular food items was up to 40% higher in Britain than in European supermarkets. The OFT's report into supermarket profitability to be published later this month, however, is unlikely to find much evidence that the four biggest firms, Tesco, Sainsbury, Safeway and Asda, are abusing their dominant position. A reference to the Monopolies and Mergers Commission (MMC) may be ordered on political grounds but Whitehall sources are sceptical about what, if anything, it would achieve.
Net profit margins of British supermarkets, averaging 6%, are double those of supermarkets on the continent. But returns on capital are as much as 5% lower than for their European counterparts. The average supermarket in Britain is roughly half the size of an American supermarket, and two-thirds the size of a typical French store, which limits economies of scale.
High land prices make it harder to build mega-stores in Britain. But even small retail outlets face high costs. Bizarrely, it is more expensive to rent shopping-space in the nondescript south London suburb of Croydon than in the plushest shopping streets of Milan, Stockholm or Dublin. A study by an estate agency, Healey & Baker, conducted last year ranked London's Oxford Street as the third most expensive shopping mile in the world after New York's Madison Avenue and Hong Kong's Causeway Bay. A recent McKinsey report on productivity found that, on average, selling-space in Britain was 40% more expensive than in America and 20% more than in France.
Part of the explanation for high rents is the strictness of British planning laws. For example, it recently took Costco, an American-style discount warehouse club, two years to obtain outline planning permission for a new store. Costco is now planning to open another 47 new warehouses in Britain, selling more than 3,500 products at discounts ranging up to 40%. Costco's managing director, Jim Murphy, says, however, that his company faces considerable difficulties, not only obtaining planning permission but also securing supplies from manufacturers reluctant to see their goods sold at a discount.
Supermarkets may eventually be reprieved by the competition authorities. But the car industry deserves to get a much rougher ride. Practices such as threats to withhold supply from dealers who fail to toe the line on prices have helped sustain Britain's dubious record as one of the most expensive countries in the world in which to buy a new car. The OFT, prodded by a parliamentary report which lambasted car dealers, retailers and importers for a variety of anti-competitive practices, is on the verge of referring the industry, worth £24 billion ($40 billion) a year, to the MMC for a full inquiry. A decision is likely to be announced next month.
Weak British competition laws are undoubtedly a large part of the reason for high prices. As the MMC's recent report into the electrical-appliance industry showed, covert price-fixing is not uncommon across much of British retailing. Over the years the OFT has pursued hundreds of price-fixing cases in products ranging from bicycles and birdcages to vacuum cleaners and video cassettes. Yet the lack of penalties meant that all that happened was that the offending company got away with an assurance of future good behaviour. This lack of enforcement powers will be tackled when the new Competition Act comes into force next year. It has much stiffer penalties, including fines of up to 10% of the value of turnover, and allows for civil action to be brought against the offending company.
Unfortunately, there continues to be a lack of focus in Whitehall about consumer issues. Mr Howells stresses that “the welfare of consumers should be at the heart of government policy.” But in reality responsibility is widely dispersed across Whitehall. In this complex web, the consumer's voice is often drowned out by entrenched interests.
Not all consumers, of course, focus primarily on price. Some are happy to accept a trade-off between higher levels of service and prices. Marks and Spencer built up their iconic position in British retailing by operating a no-questions-asked policy, allowing shoppers to return goods. The McKinsey report points out that it takes about 10% longer to pay for goods in a typical American food store. British supermarkets employ many more low-paid workers at check-out counters than foreign rivals.
British consumers can also be dozy about spotting opportunities to buy cheaply, even when they do exist. Two months ago the chief executive of Intel, Craig Barrett, criticised Dixon's, Britain's dominant distributor of personal computers, for overcharging, claiming that its pricing policies were stunting the market. Compaq and Fujitsu have made similar criticisms. This is another clear example of lack of competition leading to high prices in the High Street. But Britons could buy more cheaply, through superstores or direct mail order—they just seem to have been slower than other Europeans to do so. As a nation of shopkeepers, Britain's reputation may be as keen as it was in Napoleon's day. But as shoppers, Britons clearly have some way to go.
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